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There is an ominous event looming on the Bitcoin horizon. That event is known as 'The Halvening' in some circles. Whether it will be good or bad is a matter of debate. If history has anything to say however, it will have at least some impact on Bitcoin investors. We will know what that impact is in the very near future.
Also known as halving, the event we refer to is set to occur sometime during the month of May. It could happen as late as early June, but the numbers indicate we are already pretty close. Perhaps it will have occurred even before this post is published.
So, what is halving? And more importantly, how will that affect your wallet? Keep reading to learn everything you need to know about this once-every-four-years event. The 2020 halving could have the most profound impact on Bitcoin since its inception more than a decade ago.
Halving occurs when the number of uncirculated bitcoins (BTC) issued as mining rewards is cut in half. When it eventually occurs in this month, miners who were receiving 12.5 BTC for every completed block will earn 6.25 BTC moving forward. They will essentially be getting paid less for more work.
This might seem counterproductive in terms of incentivizing Bitcoin mining, but halving can have the opposite effect. The reason has everything to do with supply and demand combined with how investor markets work.
If you are confused, no worries. It is difficult to wrap our brains around why halving can be a good thing because we are so used to the traditional paradigm of getting paid a certain amount for the work we do. If our pay goes down while the amount of work we do increases, we feel like it's not worth continuing. Investors see things differently. More on that in a bit.
Getting a handle on why miners and investors anticipate halving begins by understanding why it occurs in the first place. The fundamental reason is rooted in the fact that there are only a limited number of bitcoins available. There are but 21 million, to be exact.
Governments and central banks in the business of printing fiat put no limit on the total number of bills and coins minted. They will print and mint whatever they need to accommodate their money supply goals. This essentially makes fiat an open-ended system that is very easily manipulated by its economic masters.
Satoshi Nakamoto, Bitcoin's original creator, realized that an open-ended cryptocurrency would not be practical if he hoped to maintain the stated goal of decentralization. Therefore, he limited the total number of coins that could ever be circulated.
All 21 million are expected to be in circulation by sometime in 2140. That is a long way off. But stretching out circulation over so many years is by design. Releasing coins slowly takes advantage of the nature of supply and demand.
Imagine what would have happened if Nakamoto had released all 21 million coins within BTC's first year. The market would have been flooded. There would have been more coins than buyers willing to invest. Furthermore, there would be nothing to give the coins real monetary value because once all were purchased, there would be no incentive to sell. Releasing all 21 million simultaneously would have destroyed Bitcoin's value before it ever got off the ground.
By controlling circulation, the Bitcoin platform also controls supply. In turn, controlling supply influences value in relation to demand. It is like anything else: value goes up when demand increases faster than supply. That is the whole point.
Halving reduces the rate at which new coins are put in circulation. In theory that keeps the supply growing at a rate slower than demand. The end result is sustained value. Think of it in terms of the miners who sell their coins on the open market.
If they are earning fewer coins for the same amount of work, doesn't it make sense that they would ask a higher price for their coins when it comes time to sell? Absolutely. As long as the demand is there, buyers will pay more. Bitcoin relies on diminishing circulation to keep the demand alive.
By now you are probably itching to learn how halving could potentially affect your wallet. In the short term, there are three schools of thought. The first says that halving will have no meaningful impact on coin price over the coming months. For that, we have history to look to.
Bitcoin halving has already happened twice. The first halving was in 2012; the second was in 2016. It is that second halving that those who subscribe to this school of thought point to. They correctly point out that BTC's price actually dropped by 10% on the very day halving occurred.
The price did quickly rebound to its pre-halving level, but there was no huge breakout as so many others had anticipated. A look back on history suggests that the 2016 halving had minimal impact on BTC prices, if any impact at all.
BTC price goes up when Bitcoin Halves
The second school of thought looks to the 2012 halving as a more accurate prediction of what will happen in 2020. In the days and weeks following that event, BTC's price did climb. In fact, BTC enjoyed steady growth right through the latter half of 2018. It wasn't until the end of that year that BTC started a steady decline.
Those who subscribe to this school of thought firmly believe that Bitcoin's value has been held in check for too long. They say that investors have been waiting for a breakout to such a degree that they are ready to pour a ton of money into BTC in the weeks following halving.
Some have speculated that BTC could eventually eclipse its high-water mark of $20,000. Others say it will go higher, but not that high. That leads us to the third school of thought that suggests just the opposite.
BTC price goes down when Bitcoin Halves
The third school of thought sees halving as a bad thing. It suggests that halving is no different from the example we mentioned at the beginning of this post: you are expected to do more work for half the pay so you decide it's not worth continuing to work.
There are some Bitcoin experts who are thoroughly convinced that halving will chase miners out of the market. They believe the smallest miners will not be able to sustain operations because their expenses will exceed revenues. Let us assume for one minute that this is the case. Why couldn't these operations sell their coins at a higher price in order to stay in business?
The first thing to note is that simply asking a higher price does not guarantee you will get it. BTC's price is ultimately determined by supply and demand. If you expect to sell one of your coins at twice the price it was worth yesterday, you need to have a buyer willing to buy it. What if investors are not willing to pay that price?
A combination of lower demand and fewer miners would send BTC's price on a downward trajectory. Investors would lose confidence in both BTC's utility and long-term prospects as a store of value. And with that lost confidence, they would be prompted to sell. Suddenly you would have a situation where supply goes up but demand goes down. You create a buyer's market that forces prices to fall.
Everything we have discussed thus far applies only to the short term. And by that, we mean the next few months. Halving is going to have a more profound impact on Bitcoin - whatever that impact might be - as the world marches closer to 2140. It has been suggested that every halving event from now until then will have an exponentially more profound impact.
Satoshi Nakamoto decided, for whatever reason, to make Bitcoin a limited commodity. As such, he had to introduce an artificial way to control coin supply and inflation, thereby protecting the value of an asset with limited volume.
In the long term - meaning 50 to 100 years from now - inflation is going to catch up with Bitcoin. It has to. Once all 21 million coins have been issued, you are left with an asset that can no longer grow. It can only be traded among owners. Without global utility that would otherwise make BTC a preferred payment system for millions, there is nothing built into the system to incentivize people to obtain BTC.
Those who currently control Bitcoin still have plenty of time to find a solution to the long-term problem. Our guess is that they are already working on it. In the short term however, halving 2020 is imminent. The chances are fairly good that BTC's price will either increase or change very little. But falling prices are still a possibility as well. We will not know until it actually happens.
Do you own Bitcoin? If so, is this your first halving event? Whatever happens, you will be able to say that you were part of Bitcoin history.
No there's no change to how you use your coins after the halvening. You can continue to gamble with Bitcoin. If you win big prior to the halvening you might just hit the jackpot if the price of BTC goes up.
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